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PwC Gives Up Top Auditor in SEC Settlement

Top PwC auditor suspended as part of MicroStrategy settlement; Pitt caught between a rock and a hard place over AOB appointment; FASB releases exposure draft on expensing stock options; good news for DaimlerChrysler workers.
Stephen Taub, | US
October 7, 2002

A lead audit partner from PricewaterhouseCoopers is expected to take the fall as part of a settlement with the Securities and Exchange Commission over the firm's audit of MicroStrategy Inc.

According to published reports, Warren Martin, a partner in PwC's Tysons Corner, Virginia, office who headed up the MicroStrategy audit, has agreed to be suspended for two years as an auditor.

Under the settlement, the SEC will not bring enforcement action against the accounting firm. The reason: the accounting problems were the result of violations by the audit partner, not a companywide breakdown or approval of bad accounting by senior management at the firm, according to theWall Street Journal. A final agreement could still take weeks or months.

The commission has been investigating PwC's role in the MicroStrategy audit for two years.

The software maker was one of the first high-profile firms to be embroiled in a revenue-recognition scandal during the tech boom. Back in March 2000, shortly before the technology bubble started to deflate, MicroStrategy executives stunned investors when they announced that the company would restate earnings for 1998 and 1999. The stock plunged 62 percent on that day.

MicroStrategy's financials unraveled when its accounting practices were questioned by a magazine in a March 2000 article. A PwC accounting expert then raised questions internally and eventually concluded that the accounting treatment was incorrect. Executives at the audit firm then informed MicroStrategy officials that the company should restate its results.

The SEC alleges that Martin signed off on improper accounting at MicroStrategy but assured PwC's management that the financials were fairly stated, according to the paper.

In May 2001, PwC agreed to pay $55 million to settle a class-action lawsuit alleging it defrauded MicroStrategy investors by approving financial reports that inflated the company's results. "While we believe our defense against the class-action claim was strong and compelling, we ultimately made a business decision to settle in order to avoid the further costs and uncertainties of litigation," Steven G. Silber, a PwC spokesman, told the Washington Post at the time.

Pitt Rails at Biggs Bashing
So, who is going to head up the new Accounting Oversight Board?

Last week it seemed like it would be John Biggs, the chief executive of TIAA-CREF, who reportedly agreed to be the first head of the board, according to a New York Times story.

However, a couple of days later, SEC chairman Harvey Pitt seemingly backed away from Biggs due to pressure from Republicans and former clients who have been arguing that Biggs is too tough on the accounting industry, according to Friday's Times. Indeed, Pitt is caught between Biggs detractors and SEC colleagues and lawmakers who want Biggs to head up the new AOB.

"It appears that the accounting firms, the Republicans and now Chairman Pitt are trying to circumvent the Sarbanes-Oxley legislation by making certain that the board does not include any reform-minded persons," Lynn E. Turner, a chief accountant at the SEC during the 1990s, told the Times. "If we lose Biggs, we lose a reform-minded board."

The paper reported that Biggs said through a spokesman that the commission had not offered him the job and declined to comment further.

Pitt lashed out at his critics, accusing them of politicizing the selection of the new accounting cop. "The deliberate plants of false information about the Accounting Oversight Board most certainly hurt the SEC, not so much because it may impair our ability to reach unanimity [on the new chairman] but because it has been done to politicize the agency," Pitt said in an interview with the Financial Times. "As the head of an independent regulatory body, I deplore these false stories."

Meanwhile, on Friday, the White House reportedly sent Anne Womack, an assistant press secretary, to serve as a senior adviser to Pitt on strategic communications and planning. It's unclear whether sending Womack to the SEC was motivated by the Bush Administration's unhappiness over the leaks concerning Biggs's possible selection or by some other reservations by the Administration about Biggs's possible appointment.

"Any time I can find a talented, smart, and articulate individual to assist in making sure our various constituencies understand my views, I would jump at the chance," Pitt told theFinancial Times, noting that many former White House officials had moved to the SEC in the past. "Any criticism of SEC communications has absolutely no validity in my view, and certainly no application to my seeking Anne out."

FASB Issues Exposure Draft
The Financial Accounting Standards Board (FASB) issued an exposure draft for an amendment to Statement No. 123, Accounting for Stock-Based Compensation. Officials at the independent accounting-rulemaking organization said the purpose of the proposed amendment is twofold:

The proposed changes provide three methods of transition for companies that voluntarily adopt the fair value—based method of recording expenses relating to employee stock options, say FASB staffers. "In addition, FASB proposes clearer and more prominent disclosures about the cost of stock-based employee compensation and an increase in the frequency of those disclosures to include publication in quarterly financial statements," noted officials. Currently companies are not required to present stock-option disclosures in interim financial statements.

Taking the Lead on Health Care
Executives at several major companies say they are fed up at the spiraling increases in health-care costs and are taking matters into their own hands—with a little help from PacifiCare Health Systems Inc.

On Friday, the Santa Ana, California-based health-services company announced a new type of health-care plan that company executives describe as the first HMO network of physicians, medical groups, and their affiliated hospitals chosen for their affordability as well as for their scores on quality-of-care measures.

Called Value Network Plan, the program is geared toward mid- and large-size employers in eight California counties.

PacifiCare officials claim that in conjunction with other employer incentives, companies can save 4 percent to 15 percent on health-care premiums under the new plan. "As health-care premiums continue to rise, employers and consumers are demanding more value from health plans," said Brad Bowlus, president and chief executive officer of PacifiCare Health Plans. "The Value Network was developed to create savings for employers and consumers while providing access to a quality network of physicians and hospitals."

Under the new plan, enrollees will have access to fewer resources: about one-third of the hospitals and one-half of the doctors of a standard HMO, according to a report in the Los Angeles Times.

Value Network members who use providers outside the shrunken network generally will have to pick up the tab themselves, says the report.

Indeed, a number of well-regarded institutions have been excluded from PacifiCare's new HMO, including Cedars-Sinai Medical Center, UCLA Medical Center, and Children's Hospital of Los Angeles. However, the trimmed-down roster hasn't scared away employers. Among those that have already signed up: Wells Fargo, Lockheed Martin, Xerox, and Pitney Bowes, say executives at PacifiCare.

"This is one of the models everybody is looking to," said Helen Darling, president of the Washington Business Group on Health, which represents 175 major companies in the United States, in the Times article. "There will be some people who embrace it, some who don't. But I think that's the direction we're headed in."

Short Takes

Doing their part to lower the unemployment rate, officials at DaimlerChrysler AG announced on Friday that they were adding a third shift of workers at Chrysler's Warren Truck Assembly Plant outside Detroit to help meet strong demand for its Ram full-size pickup truck. The additional shift will result in the addition of 1,000 jobs at the plant. (CFO PeerMetrix: Though GM and Ford are gaining, DaimlerChrysler still leads both of those Detroit rivals in cost management.)